The mining newspaper for Alaska and Canada's North
The mining newspaper for Alaska and Canada's North
Projected cash flow from Rock Creek operation dries up; aggressive miner scrambles to salvage interest in Donlin, Galore projects
Reeling from regulatory and operating problems at the Rock Creek Mine 12 kilometers, or 8 miles, from Nome and effects of the recent credit drought, NovaGold Resources Inc. Nov. 24 said it has suspended production at the Rock Creek gold mine for at least six months. The move comes less than three months after production startup at the small gold mining project in September.
The Vancouver, B.C.-based fledgling producer blamed its financial troubles on huge unexpected cost overruns at Rock Creek and its inability to generate significant cash flow from assets.
In mid-October, NovaGold foresaw cash flow in 2009 from the Rock Creek Mine of more than C$25 million at then prevailing gold price and exchange rates. The company had planned to use the cash to fund its ongoing operations.
One month later, NovaGold said it expects the mine to generate little, if any, significant net cash flow over the next six months, based on a gold price of $750 per ounce and current exchange rates.
Taking that into account along with further capital requirements and increased operating costs combined with uncertainty regarding operation of the project, the company decided to suspend operations at Rock Creek.
Debt difficulties
The aggressive miner also said it had been unable to arrange bank financing to repay a $20 million bridge loan due Dec. 29.
Though it still had about C$10 million in cash on hand, NovaGold said it opted to not make a C$1.9 million payment due Nov. 24 to the Galore Creek Partnership, which operates the Galore Creek copper-gold-silver project in northern British Columbia for the miner and its 50-50 partner Teck Cominco Ltd.
Teck and NovaGold put that project on hold a year ago when its capital cost projections nearly doubled to about C$5 billion. The Galore Creek Partnership since has revisited its development plan for the project and come up with a more economical approach.
NovaGold said it would approach Teck Cominco to discuss other ways to meet its obligations at Galore Creek. If NovaGold does not reach alternative arrangements with its partner and does not make the payment within five business days of receiving notice of such nonpayment, its interest in the Galore Creek Partnership may be diluted by about two-tenths of a percentage point to 49.8 percent interest, the company said.
NovaGold also said it would make a $3.9 million payment due Nov. 27 to Donlin Creek LLC, operator of the Donlin Creek Project for the miner and its 50-50 partner in the project Barrick Gold Corp.
"Though this has been a difficult decision with Rock Creek, based on the current economic conditions, and the challenges associated with meeting environmental requirements compounded by working through the arctic winter we believe these actions are in the best interest of the company at this time," NovaGold President and CEO Rick Van Nieuwenhuyse said in a statement Nov. 24. "NovaGold will focus most of its resources and efforts on its Donlin Creek property while continuing to seek sources of cash and to take steps to reduce costs."
NovaGold also said it accepted the resignation of Vice President of Operations Carl Gagnier, effective Dec. 31.
Patrick Downey, president and CEO of Aura Minerals Inc., also resigned from NovaGold's board of directors on Nov. 25 to focus on his position at Aura Minerals.
NovaGold's stock plummeted $1.48 to close at 72 cents per share Nov. 24 after the company informed shareholders of its plans.
Rock Creek troubles
NovaGold said it spent about $30 million at Rock Creek since Aug. 31 and is about $20 million over its most recent budget for the venture. The unplanned spending exacerbated NovaGold's inability to arrange bank financing to repay the bridge loan and to realize additional cash from existing assets as well as delayed commissioning of the mill and achieving commercial production at Rock Creek.
The higher costs resulted from mechanical and regulatory difficulties that first surfaced last winter. Ongoing efforts to resolve the problems led to the additional spending.
The Rock Creek mine received regulatory authorizations and began commissioning startup in September 2008. Environmental and operational tasks to ensure compliance with regulatory requirements for the mine, plus more complications and recent notification from federal and state regulators that certain conditions in the previously granted permits had not been met have led to the escalating costs.
Resolution efforts will continue
Though the company continues to work with state and federal regulators to resolve the problems, Rock Creek operations could face financial penalties or have additional mitigation or monitoring requirements imposed, NovaGold said.
In addition, Rock Creek has experienced unanticipated mechanical problems including an electrical failure with the milling circuit and the company has ongoing concerns with the efficiency of the process and recovery circuit. These issues have been compounded by the effects of extreme arctic weather conditions.
NovaGold said regulatory consequences of a suspension are uncertain and existing environmental requirements will continue to be met during this suspension. As part of its requirements under Canadian (GAAP) accounting rules, the company will be reviewing impairment testing for the project.
The company also said it will continue to review strategic alternatives, seek additional equity and debt financing, and pursue the sale of assets and other restructuring alternatives. Under the terms of the secured bridge loan, any additional funds raised through debt or equity must first be used to repay such obligations.
"There can be no assurance that any strategic alternative or transaction will be successfully completed," the company said.
If NovaGold is not able to raise additional cash in December, it will not have sufficient cash to meet its obligations.
Over his more than 16 years of covering mining and mineral exploration, Shane has become renowned for his ability to report on the sector in a way that is technically sound enough to inform industry insiders while being easy to understand by a wider audience.
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